Underwritting

Underwritting

1. Underwriting of shares and debentures Presented by: Harshit Garg Assistant Professor IBM (UG) BCCC 0011 Company Accounts And Practices 1

2. Learning Objectives What is Underwriting of Shares and Debentures Meaning of Underwriting Commission Types of Underwriting Provision of companies act effecting underwriting commission 2 BCCC 0011 Company Accounts And Practices

3. What is Underwriting of Shares and Debentures Underwriting is an agreement where by the underwriters ensure the company that in case the shares and debentures offered to the public , are not subscribed by the public to the extent, the balance of shares and debentures will be taken up by the underwriters. For this service, they get underwriting commission. 3 BCCC 0011 Company Accounts And Practices

4. Meaning of Underwriting Commission Underwriting commission is payment which is given by company to underwriters for their services of underwriting. Actually , contract of underwriting is same   as the contract of insurance . Company gives maximum 5% commission to underwriter for selling his shares . Company gives maximum 2.5% commission to underwriter for selling his Debentures.Underwriter will take the risk of takeover the shares which will not be subscribed by public. 4 BCCC 0011 Company Accounts And Practices

5. Qu Underwriting is a contract between ………………., &………….. What is the % of Underwriting Commission On Share - On Debentures – The functions of underwriters is to …………………………… of floated shares If the company was not able to collect the …………….% amount ,then it needs to compulsory return the money to those who have subscribed the shares Payment to underwriting commission is authorized under ………………..Association . As per latest SEBI Guidelines ,underwriting is not mandatory- T/F As per SEBI Guidelines , any share broker act as underwriter - T/F A merchant banker wants to act as a underwriter so the certificate provided by ……………………. 5 BCCC 0011 Company Accounts And Practices

6. Some Underwriting agency in india Industrial development bank of india CIL Securities ltd Aarnik securities private Ltd Arihant corporate service Ltd. BNR Service private Ltd. Computech international private ltd. 6 BCCC 0011 Company Accounts And Practices

7. Sample of underwriting Agreement BCCC 0011 Company Accounts And Practices 7

8. Sub Underwriting: An underwriter may himself enter into a sub-agreement with other persons , called sub- underwriters, whereby he transfers a part of his underwriting risk. Just like re-insurance , sub- underwriting helps in spreading the risk. An underwriter may appoint several underwriters to work under him. However, the sub-underwriters have no privacy of contract with the company . They get their commission from the underwriter and are also responsible to him. 8 BCCC 0011 Company Accounts And Practices

9. Underwriters To avoid the risk of under-subscription companies may seek the help of a specialised group of risk-redeemers called Underwriters. The function of the Underwriters is to arrange subscription of floated shares . The firms or persons who are engaged in underwriting are called  underwriters. The commission payable to underwriters for underwriting is known as  underwriting commission. 9 BCCC 0011 Company Accounts And Practices

10. Advantages of Underwriting Advantages of Underwriting 1. The company is sure of getting the value of shares issued 2. It enhances goodwill of the company 3. It facilitates wide distribution of securities 4. The company gets expert advice from underwriters in the matter of marketing securities 5. It fulfills requirement of minimum subscription BCCC 0011 Company Accounts And Practices 10

11. Provisions regarding Underwriting 1 . A company cannot pay any commission on the issue of shares unless permitted by its Articles . 2. Commission cannot be paid to any person for shares or debentures which are not offered to the public for subscription. 3. The commission is limited to 5% of issue price in case of shares and 2 ½ % in case of debentures. However, in practice , SEBI has allowed underwriting commission only at the rate of 2.5% of issue price of equity shares . 4. The amount or rate of commission should be disclosed in the prospectus. 5. The directors must state in the prospectus that the underwriters are capable of meeting their obligations under the underwriting contract . BCCC 0011 Company Accounts And Practices 11

12. Underwriting Agreement 12 BCCC 0011 Company Accounts And Practices

13. Marked or Unmarked Application Generally shares or debentures of a company are underwritten by two or more underwriters in an agreed ratio . Usually the forms are stamped with the name of the underwriters in order to distinguish the forms of one underwriter from that of others. Such stamped applications when received are called   marked applications . The application forms which are received by the company without any name of the underwriter are called   unmarked applications 13 BCCC 0011 Company Accounts And Practices

14. 1 Word In ………………underwriting the underwriters are agreed to taken the share only when the shares are not subscribed by public In ……………….. Underwriting the Underwriter agree to make up agreed proportion of shares irrespective of the Public response to the issue Marked application are those applications which are bear the ……………….. Of underwriters Overriding commission is paid by the principal underwriter to sub underwriter - T/F BCCC 0011 Company Accounts And Practices 14

15. Determination of Liability in respect of Underwriting Contract BCCC 0011 Company Accounts And Practices 15

16. Journal Entries in the books of the Company 16 BCCC 0011 Company Accounts And Practices 1. For commission due:              Underwriting  Commission A/c                           Dr                                 To Underwriters 2. In case the whole of shares or debentures are not taken up by the public, the remaining is allotted to underwriters. The entry is:              Underwriters   A/c                                                   Dr                                 To Share Capital A/c                                 To Debentures A/c                 ( Balance of shares and debentures allotted to underwriters) 3. For payment of commission:                 Underwriter A/c                                                     Dr                                 To Bank                                                                 ( cheque )                                 To Share Capital A/c                           ( shares )                                 To Debentures A/c                               (debentures) 4. For the balance amount due from underwriters received:                 Bank A/c                                                                Dr                                 To Underwriters A/c

17. Underwriting A/c 17 BCCC 0011 Company Accounts And Practices    This account is prepared by the underwriter to ascertain the profit or loss on underwriting. It is a nominal account and is prepared like a P/L A/c

18. When whole issue is underwritten by by the underwriter is called ……………. BCCC 0011 Company Accounts And Practices 18

19. a) When issue is fully underwritten (without Firm Underwriting) When the entire issue has been underwritten by one underwriter, the liability of the underwriter is calculated as follows: Liability = No. of shares underwritten – Total no. of application If the entire issue has been underwritten by two or more underwriters, all unmarked applications are divided between them in the ratio of gross liability of individual underwriter . BCCC 0011 Company Accounts And Practices 19

20. Format Of Underwriting Statement Liability of each underwriter is calculated as follows: Gross liability according to the agreed ratio                                       ……….. Less: Marked applications                                                               ………..           Balance left                                                                          ……….. Less: Unmarked application in the ratio of gross liability                    ………..                  Net liability                                                                          ………... BCCC 0011 Company Accounts And Practices 20

21. BCCC 0011 Company Accounts And Practices 21

22. When the issue is fully underwritten (with Firm Underwriting )  . BCCC 0011 Company Accounts And Practices 22                              Liability of each underwriter is calculated as follows: Gross liability according to the agreed ratio                                        ……….. Less: Marked Application (excluding firm underwriting)                       ………..    Balance left                                                                          ……….. Less:   *Unmarked application in the ratio of gross liability                   … Net ability                                                                           ……… A dd . Firm _ underwriting                                             …….......                Total Liability                                            ………… No. of Unmarked application = Total subscription excluding firm underwriting – Marked application excluding firm underwriting + Application under firm underwriting.

23. c) When the issue is partially underwritten BCCC 0011 Company Accounts And Practices 23 Liability = Gross Liability – Marked application + Firm underwriting  (if there is firm underwriting) Note:  If no information is given regarding marked and unmarked application, marked application is calculated as follows: Marked applications = Total No. of application received x % of underwriting

24. Marked or Unmarked Application Generally shares or debentures of a company are underwritten by two or more underwriters in an agreed ratio . Usually the forms are stamped with the name of the underwriters in order to distinguish the forms of one underwriter from that of others. Such stamped applications when received are called   marked applications . The application forms which are received by the company without any name of the underwriter are called   unmarked applications 24 BCCC 0011 Company Accounts And Practices

25. Q-1 1. Rahul Ltd issued 10,000 shares .Company appointed underwriters X for 6000 share and Y appoint for 4000 shares so this is a case of. Fully Underwritten -Without Firm underwriting Fully Underwritten -With Firm underwriting Partial Underwritten - Without Firm underwriting Partial Underwritten - With Firm underwriting BCCC 0011 Company Accounts And Practices 25

26. 2 . Rahul Ltd issued 10,000 shares .Company appointed underwriters X for 45% share and Y appoint for 35% shares and remaining were issued by company itself ,so this is a case of . Fully Underwritten -Without Firm underwriting Fully Underwritten -With Firm underwriting Partial Underwritten - Without Firm underwriting Partial Underwritten - With Firm underwriting BCCC 0011 Company Accounts And Practices 26

27. 3. Rahul Ltd issued 10,000 shares .Company appointed underwriters X for 6000 share and Y appoint for 4000 shares. Company received marked application of X-4000, Y- 6000, so Net Liability of Y should be. 2000 4000 6000 BCCC 0011 Company Accounts And Practices 27

28. 4. Rahul Ltd issued 10,000 shares .Company appointed underwriters X for 6000 share and Y appoint for 4000 shares . Company received applications in full .out of Company received marked application of X-3000 , Y- 2500 , so total unmarked applications are 5500 4500 3000 2500 BCCC 0011 Company Accounts And Practices 28

29. 5. Rahul Ltd issued 10,000 shares .Company appointed underwriters X for 6000 share and Y appoint for 4000 shares . Company received applications of 5500 .in which Company received marked application of X-3000, Y- 2500, so Net Liability of X is 3000 1500 3500 BCCC 0011 Company Accounts And Practices 29

30. 6. Rahul Ltd issued 10,000 shares .Company appointed underwriters X for 6000 share and Y appoint for 4000 shares . Company received applications of 5500 .in which Company received marked application of X-3000, Y- 2500, so Net Liability of Y is 3000 1500 3500 BCCC 0011 Company Accounts And Practices 30

31. Q. -1 A ltd issued 100000 equity shares .The whole issue was underwritten as :- X 40%, Y-30%,Z-30% Application for 80,000 shares were received in all , out of which applications for 20000 shares had stamped of X ,those for 10000 shares had that of Y , and 20000 shares had that of Z , the remaining applications for 30000 shares did not bear any stamp .Show the liability of underwriters? 31 BCCC 0011 Company Accounts And Practices

32. ANS -1 32 BCCC 0011 Company Accounts And Practices STATEMENT SHOWING LIABILITY OF UNDERWRITER UNDERWRITER X Y Z Gross Liability (40%,30%,30%) 40000 30000 30000 Less - Marked applications 20000 10000 20000   20000 20000 10000 Less - Unmarked applications       ( 30000 shares in 4:3:3) 12000 9000 9000 NET LIABILTY 8000 11000 1000

33. Q-2 (SELF) Mohan ltd issued 2,00,000 equity shares .The whole issue was underwritten as :- A 50 %, B-50% Application for 1,75,000 shares were received in all , out of which applications for 60,000 shares had stamped of A ,those for 50,000 shares had that of B , the remaining applications did not bear any stamp .Show the liability of underwriters? 33 BCCC 0011 Company Accounts And Practices

34. ANS -2 <Bullet Points should not be more than 5> Point-2 Point-3 Point-4 Point-5 34 BCCC 0011 Company Accounts And Practices STATEMENT SHOWING LIABILITY OF UNDERWRITER UNDERWRITER A B Gross Liability (50%,50%) 100000 100000 Less - Marked applications 60000 50000   40000 50000 Less - Unmarked applications     ( 65000 shares in 5:5) 32500 32500 NET LIABILTY 7500 17500

35. Qu -3(SELF) Newton Ltd . Incorporated on 1 January 2005 , issued a prospectus inviting applications for 20000 equity shares of Rs . 10 each . The whole issue was fully underwritten by A,B,C as follows: A-10000 shares , B- 6000 shares , C - 4000 shares Applications were received for 16000 shares of which marks application as follows : A- 8000 Shares , B – 2850 shares and C- 4150 shares You are required to find out liability of individual underwriter. 35 BCCC 0011 Company Accounts And Practices

36. 36 BCCC 0011 Company Accounts And Practices STATEMENT SHOWING LIABILITY OF UNDERWRITER UNDERWRITER A B C Gross Liability 10000 6000 4000 Less - Marked applications 8000 2850 4150   2000 3150 -150 Less - Unmarked applications       (16000-8000-2850-4150) 500 300 200 Resultant Liabilty 1500 2850 -350 Less -surplus of C alloted to A,B 219 131 350 ( RATIO 5:3)       Net Liability 1281 2719 NIL

37. Qu -4 Modi Ltd. Incorporated on 1 May 2020 , issued a prospectus inviting applications for 60000 equity shares of Rs . 20 each. The whole issue was fully underwritten by X,Y,Z as follows: X-25000 shares , B- 20000 shares C – 15000 Share Applications were received for 50000 shares of which marks application as follows : X - 25000 Shares , Y – 10000 shares and Z- 10000 shares You are required to find out liability of individual underwriter. 37 BCCC 0011 Company Accounts And Practices

38. ANS -4 STATEMENT SHOWING LIABILITY OF UNDERWRITER UNDERWRITER X Y Z Gross Liability 25000 20000 15000 Less - Marked applications 25000 10000 10000   10000 5000 Less - Unmarked applications       (45000-30000-10000-10000) 2083 1667 1250 Resultant Liabilty -2083 8333 3750 Less -surplus of C alloted to X,Y 2083 1190 893 ( RATIO 4:3)       Net Liability NIL 7143 2857 BCCC 0011 Company Accounts And Practices 38

39. With firm underwriting –Q.5 J ltd has issued 20,000 shares which were underwritten as follows : A-12,000 Share, B-5000 Shares, C-3000 Shares The Underwriters made applications for firms underwriting as : A-1600 Shares , B -600 Shares, C- 2000 Shares The total subscription excluding firm underwriting but including marked applications were for 10000 shares The Marked applications as under : A-2000 Shares , B -4000 Shares , C-1000 Shares You are required to show the allocation of liability of the underwriters. BCCC 0011 Company Accounts And Practices 39

40. ANS -5 STATEMENT SHOWING LIABILITY OF UNDERWRITER UNDERWRITER A B C TOTAL Gross Liability 12000 5000 3000 20000 Less - Marked applications 2000 4000 1000 7000   10000 1000 2000 13000 Less - Unmarked applications 4320 1800 1080 7200 10000-7000+4200)       Resultant Liabilty 5680 -800 920 5800 Less -surplus of C alloted to X,Y 640 800 160 1600 ( RATIO 12:3)       Net Liability as per Agreement 5040 760 5800 Add :- Firm Underwriting 1600 600 2000 4200 Total Liability 6640 600 2760 10000 BCCC 0011 Company Accounts And Practices 40

41. Q.6 (Self) ABC ltd has issued 80,000 shares which were underwritten as follows : M-30,000 Share, N-30000 Shares, O-20000 Shares The Underwriters made applications for firms underwriting as : M -10000 Shares , N -5000 Shares, O- 1000 Shares The total subscription excluding firm underwriting but including marked applications were for 60000 shares The Marked applications as under : M-25000 Shares , N -5000 Shares , O-15000 Shares You are required to show the allocation of liability of the underwriters. BCCC 0011 Company Accounts And Practices 41

42. ANS -6 STATEMENT SHOWING LIABILITY OF UNDERWRITER UNDERWRITER M N O TOTAL Gross Liability 30000 30000 20000 80000 Less - Marked applications 25000 5000 15000 45000   5000 25000 5000 35000 Less - Unmarked applications 11625 11625 7750 31000 (60000-45000+16000)       Resultant Liabilty -6625 13375 -2750 4000 Less -surplus of C alloted to X,Y -6625 9375 -2750 ( RATIO 3:2)       Net Liability as per Agreement 4000 4000 Add :- Firm Underwriting 10000 5000 1000 16000 Total Liability 10000 9000 1000 20000 BCCC 0011 Company Accounts And Practices 42